Property, property, property. The COVID-19 crisis has affected the property market for good and bad. It has been said that this is the time to jump on the property bandwagon if you haven’t already. So if you are looking to buy your first home or first investment property, we have some advice for you so listen up.
If this is your first time buying any type of property, it is important to do your research and don’t overstretch yourself. Or as grandfathers across the world love to say… ‘don’t bite off more than you can chew‘.
As a first-time buyer, you’d be looking at two types of property. Either you want to look for a home – somewhere you’d like to live in for at least the next 5-7 years, or you’d want to buy a property that is more easily (using the term very loosely) affordable to you and will want to lease to a tenant while you rest your head somewhere else. This is called rent-vesting. It is worth pointing out that these two types of properties each have their pros and cons but it is vital that you decide first what type of property you will be looking for from the beginning.
Why is this so important when you buy? A home or an investment property is a huge financial commitment and we are know how complex the market can be, and sometimes it feels like lenders, brokers and everyone in the industry is out trying to sell you something that might not be the right fit for you.
So here are 4 key steps to starting you in the property game like a boss!
Home Sweet Home or Rent-vesting?
First-home purchases are known for being more emotional than the investment property, and rightly so. You don’t want to live in a hovel just because ‘the numbers make sense’. When you are looking for your first home, you’d normally go into the inspections feeling the vibe of the place, getting to know the neighbours, and visualising yourself living there. This means we tend to push our budget over if we find a real winner!
On the other hand, an investor should be looking at the yield long term, the area’s population growth, as well as commercial growth, and the amenities and the services close to the area such as public transport, cafes, supermarket, etc. So, looking at the long-term benefits is the key.
It’s important to consider that each of these options will determine the structure of your finance and the type of loan product you get, and also what interest rate you are offered. On top of that, some government grants are only applicable for home-buyers so take that into consideration.
How much have you got for a deposit?
A very basic step but important to mention too. What does your deposit $$ look like?
Experts say a 20% deposit is ideal, but obviously with the property prices in the major cities in Australia, this can be difficult. There are other ways you could access the property market with a smaller deposit, and one is to get lenders mortgage insurance, insurance you will have to pay if you don’t meet the 20% deposit. This covers your lender in case you are unable to meet your home loan repayments. However, each year 10,000 eligible first-home buyers will have the ability to apply for a home loan with as little as 5% deposit without having to get the lenders mortgage insurance.
With the current economic climate, regulations are becoming tighter and lenders are becoming extra careful as to who they lend money to and for what purpose. So now’s the time to get your financial house in order, and get in line with your spending habits and unnecessary spending like UberEats, which can affect the amount of money you are lent (yep, they will check that!).
How to work out your budget
Yes, we all want all the nice things now but the ultimate question is, how much can you really afford?
A good way to work out your budget is to calculate your potential monthly repayments (approximately) based on the current interest rate on the borrowed amount. Money Smart is a great place to help you calculate how much you can borrow by putting in the amount you are comfortable to pay monthly (affordable repayment).
For example, right now if I was to buy my first home at the current interest rate of 2.76% and I am comfortable paying $3,500 monthly for 25 years I could afford to borrow $755,701. Based on this I would look for a property on this price.
Minimising your expenses will enable you to borrow more with the bank as you will have more income to service the mortgage repayments once you’ve purchased your home.
As a general guide, it’s best to write down all your expenses and work out exactly which of those are necessary, as in which ones you need to survive as opposed to which ones you think you need to survive.
Every lender, bank and broker will be able to give you a ‘pre-approval’ which is a formal assessment of your income, expenses, assets and liabilities, which then gives you an estimate on how much you can afford to borrow. This pre-approval lasts for 6 months – plenty of time to find your first home!
Tip: a broker or loan comparison site will be able to give you an idea of the different banks and which one may suit you. Each bank has slightly different lending policies so depending on your bank you can borrow slightly more or less than another bank.
Location, location, location
Finding your first home or investment property will depend on your lifestyle or the best (calculated) yield or capital gain. Typically, first-home buyers will purchase properties in areas they know and are familiar with. If you’re thinking of moving out of an area it can be worthwhile to spend some time walking around the area you’re thinking of purchasing in and even staving for a few nights in an Airbnb – it will save you money in the long run!
Tip: Make sure you Airbnb a place on a weekday so you can check out your morning commute and how your daily routine will work.
For investment properties, as a general rule of thumb, properties within a 10-30 kilometre radius of a major city with high population growth will generally be in higher demand when buying, selling or renting. Interest rate fluctuations can affect this due to supply and demand and other affordability issues however properties purchased within these areas will often provide a better return overall with less risk.
If your ideal lifestyle, home or location is out of reach, it can be a good option to look at properties in the neighbouring suburb. Over time with the high population growth in major cities, these suburbs will often increase in value and can even maximise your return!
It’s far easier to buy your first home when you know what steps to take. And for one final grandfatherly tip:
“it’s important to have at least one property in your portfolio that you either own or aspire to own outright (not owned by the bank), so you’ll always have a roof over your head”.